Are city's tax loss worries overblown?

Sunday

Mar 3, 2013 at 6:00 AMMar 3, 2013 at 6:16 AM

By Shaun Sutner TELEGRAM & GAZETTE STAFF

When City Hall erupted in indignation at the University of Massachusetts Medical School's alleged secretive coup in snatching up the city's biggest biotech park on the cheap and likely erasing it from the tax rolls, city officials weren't the only ones apparently taken by surprise.

So were some puzzled observers who saw the anguish emanating from Main Street in recent weeks as a dramatic overreaction to what was essentially standard behavior of a big nonprofit exerting its financial clout over property that fit with its research mission and future plans.

“It's a highly emotional issue, but everybody should step back a little and not get so emotional about it,” said Kevin O'Sullivan, president and CEO of Worcester-based Massachusetts Biomedical Initiatives and one of the leaders of the state's life sciences industry. “I don't think it was at all a secret (that the park was on the market), and UMass is a great partner in this. They're going to keep it a commercial research park, and those entities will be paying taxes.”

And while City Manager Michael V. O'Brien, city councilors and radio host Jordan Levy have lambasted UMass officials for purportedly planning to remove some $1.5 million in tax revenue through the school's $40 million acquisition of three biotech buildings, it is far from clear what the tax impact will be.

At least in the short term, until next June and the end of the fiscal year, UMass will continue to pay the full $1.5 million that former owner Alexandria Real Estate Equities Inc. paid on the buildings.

The school has gone out of its way to emphasize that it is financing its acquisition by using money from the cash reserves held by its Worcester City Campus Corp. real estate subsidiary, and replenishing the reserves — now down to about $21 million — with taxable 20-year bonds.

For his part, Mr. O'Brien said he is worried about what will happen after that and about the taxes the city would be deprived of if any of the 366,000 square feet of space the school bought late last month were to become empty. Under tax law, nonprofits can be exempt from taxes on vacant space for up to two years, and indefinitely on space devoted to nonprofit use.

The manager said he would prefer the school to voluntarily pay its share of taxes even if space is empty.

“This is Class A lab space. We are facing the reality of losing a significant amount of property of that condition, of that type, all at once with the question mark of what the future means,” Mr. O'Brien said in an interview. “Is there a 50 percent exemption right away? Five years out is there a 100 percent exemption?

“Now that this is public, there's a recognition that the city and the place where (the school) resides both have to be successful for them both to succeed,” he added.

UMass officials maintain their goal is to keep the biotech park filled with private, for-profit research companies, as it is now, both right away and in the long term, and to maintain the buildings as top-notch research facilities.

“We have recognized in the opportunity to buy these buildings, the opportunity for long-term investment in our campus and a long-term investment in life sciences in Central Massachusetts,” said Mark L. Shelton, associate vice chancellor for communications at the medical school.

Meanwhile, the combustible issue of payments in lieu of taxes, or PILOT, or some other kind of intergovernmental agreement the city could seek, is simmering in the background and appears to be on the agenda for upcoming negotiations between city and school officials.

Unlike some other colleges and universities here, the medical school has no formal PILOT agreement under which it makes regular payments to make up for taxes it would be responsible for — which would amount to more than $5.6 million annually, according to the city.

UMass officials say they spent more than $325,000 last year to fund city and school health and science initiatives.

That is a tiny fraction of the medical school's $1.1 billion budget and far less proportionately than that which another local nonprofit, Worcester Polytechnic Institute, for example, makes. With a budget of $170 million, WPI gives the city an annual PILOT payment of more than $450,000, under a formal written contract.

By law, tax-free entities such as universities, schools or hospitals can be exempt from taxes on the property they own, but only if they apply each year for exemptions on the grounds that the use of the property meshes with their nonprofit mission, according to city Assessor William J. Ford.

If the activity in a building owned by the medical school is for profit — as the school maintains it will be in the future as it seeks to lease space to private life sciences firms — then the owner must keep paying taxes. If 80 percent of the activity is private, and 20 percent is nonprofit, then 80 percent of the taxes must be paid, Mr. Ford said.

The point of contention between the city and the school appears to be over vacancy.

Even before the sale of the Biotech 3, 4 and 5 buildings across from the UMass campus went through late last month, the medical school had already decided to move its researchers — who occupied just over a third of the buildings — to its new Albert Sherman center and other buildings on campus. The school will continue to largely occupy Biotech 1 and Biotech 2, which it has owned since the 1990s.

Nonprofit-owned vacant space is nontaxable for up to two years, according to Mr. Ford, the city assessor.

With the park's current vacancy rate between 5 percent and 10 percent, a new vacancy rate of up to 50 percent created by UMass' departure from its own buildings could, indeed, deprive the city of considerable tax payments.

UMass officials say they have already scheduled an open house for commercial real estate brokers this month to market the property.

But city officials should not be overly concerned that the biotech labs will go empty after the departure of UMass researchers and one of the park's major tenants, Quest Diagnostics, later this year, said James Umphrey, a principal at Kelleher and Sadowsky, the Worcester commercial real estate firm.

Mr. Umphrey, who was involved in leasing space for Alexandria, said the park has always generated a profit and maintained healthy occupancy rates, and he sees no reason why that shouldn't continue, especially with the added prestige of a major medical school as the owner.

“My opinion as to why they purchased these buildings is because they already own everything around them ... so it just made sense for them to control these buildings across the street,” he said. “The three buildings they bought are beautiful buildings.

“Today, these buildings make money,” Mr. Umphrey continued. “And they will continue to be economically viable. The spaces are definitely marketable.”

Apart from the merits of tax revenues and future marketability and uses of the biotech park, the episode highlighted the shifting tactics of public officials in the battle for public perception.

It was no secret that Mr. O'Brien, the city manager, was palpably angry about UMass announcing the sale without warning him beforehand, and one city councilor said she was “insulted” and another said she felt stabbed in the heart by the development. It was also clear that UMass leaders were forced into heavy damage control mode afterward.

James B. Leary, a top community relations aide to Chancellor Michael F. Collins and Worcester native and former chief of staff for Lt. Gov. Timothy P. Murray, was dispatched to quell the anxieties of the manager and councilors.

And last week, Dr. Collins and Mr. Leary trekked to Boston to meet at the Statehouse with state Sen. Michael O. Moore, D-Millbury, chairman of the Legislature's Education Committee, at Mr. Moore's request.

Mr. Moore said he will hold a hearing in the coming weeks to examine the tax implications to the city. He said he believed the medical school handled the public relations aspect of its move poorly — a position that Mr. Levy hammered on much of last week on the radio — though the lawmaker said he was confident the biotech park is in good hands.

Mr. Shelton, the UMass spokesman, has maintained all along that the school was bound by confidentiality during its negotiations with Alexandria and notified city leaders appropriately once the deal was consummated.

“The medical school was made aware of the availability of the biotech park for sale and the previous owner's plan for leaving the market, and we proceeded very prudently and ended up with an asset that has long-term value for the community,” he said. “I don't know of a standard practice that involves consultation routinely.”

Contact Shaun Sutner at ssutner@telegram.com or follow him on Twitter @ssutner.